Would it be crazy to reduce house prices by 40%?

crazy reduce house prices

Economist Arthur Grimes yesterday suggested building 150,000 new homes to reduce Auckland house prices by 40%. This idea was described as ‘just crazy’ by the Prime Minister. Is it?

Affordability

We know that in Auckland the median house price is more than 9 times the median household income. The standard international definition of ‘affordable’ is 3 times, so it is pretty safe to say that Auckland’s house prices are a long way from being affordable.

The maths of restoring affordability are fairly simple; we need to reduce house prices relative to incomes. To achieve that we either need to reduce house prices, increase incomes, or both; slow the growth in house prices so that it is less than the growth in incomes.

In contrast, the Government’s target is to return house price growth to ‘single digits’. That is no guarantee of house prices becoming more affordable. Instead, if the Government achieves their target it could just as likely mean that already unaffordable housing gets slowly more unaffordable. As an aside, returning house price growth to single digits seems inevitable – the current rate of growth cannot be sustained indefinitely – at some price level people would stop buying.

From an affordability perspective Grimes’ plan seems comparatively sane.

Financial Risk

The concern the Prime Minister raised was that people would lose their equity and banks would be put in trouble. 

Read more here:

http://morganfoundation.org.nz/crazy-reduce-house-prices-40/?utm_campaign=coschedule&utm_source=facebook_page&utm_medium=Gareth%20Morgan&utm_content=Would%20it%20be%20Crazy%20to%20Reduce%20House%20Prices%20by%2040%25%3F

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